Fakhar-E-Azam

L1F17BSAF0077

Assignment # 2

Financial Analysis

What are DuPont analysis? Why they are needed. Explain the utility
of DuPont analysis from various stakeholders viewpoint

DuPont Analysis

A type of analysis that examines a company's Return on Equity (ROE)

by breaking it into three main components: profit margin, asset
turnover and leverage factor. By breaking the ROE into distinct parts,
investors can examine how effectively a company is using equity, since
poorly performing components will drag down the overall figure. To
calculate a firm's ROE through Du Pont analysis, multiply the profit
margin (net income divided by sales), asset turnover (sales divided by
assets) and leverage factor (total assets divided by shareholders'
equity) together. If higher result, the higher the return on equity.

There are three major financial metrics that drive return on equity
(ROE).Operating efficiency is represented by net profit margin or net income
divided by total sales or revenue. Asset use efficiency is measured by the
asset turnover ratio. Leverage is measured by the equity multiplier, which is
equal to average assets divided by average equity.

1. Profitability (measured by net profit margin)

2. Asset efficiency (measured by asset turnover)

3. Financial leverage (measured by equity multiplier)

Formula of DuPont Analysis

Basic Du Pont

Return on investment =return on assets =Earning power

ROI=ROA=Earning power

ROI=net profit margin x Total asset turnover

= (Net profit after taxes / net sales*100) x (Net sale /Total assets)

= (Net profit after taxes/total assets) *100

This ratio tells us the earning power on shareholders book value investment
and is frequently used in comparing two or more firm is in industry

Extended Du Pont Analysis

ROE = Return on Shareholder equity

ROE= net profit margin x Total asset turnover x Equity Multiple

= (Net profit after taxes / net sales) x (Net sale /Total assets) x (Total
Assets / Shareholder Equity)

= (Net profit after taxes/Shareholders equity) *100

DuPont Analysis with Stakeholders Point of view:

 For model, particular sorts of high turnover enterprises, for example,

retail locations, may have low overall revenues on deals and generally
low budgetary influence. In businesses, for example, these, the
proportion of advantage turnover is substantially more significant. High
edge ventures, then again, for example, style, may determine a
significant segment of their upper hand from selling at a higher edge.
For top of the line style and other extravagance brands, expanding
deals without relinquishing edge might be basic.
 Finally, a few businesses, for example, those in the money related part,
predominantly depend on high influence to produce an adequate profit
 for value. While an elevated level of influence could be viewed as
excessively dangerous from certain points of view, DuPont
investigation empowers outsiders to contrast that influence and other
monetary components that can decide an organization's arrival on
value.
 The DuPont Equation is less helpful for certain ventures, that don't
utilize certain ideas or for which the ideas are less important. Then
again, a few enterprises may depend on a solitary factor of the DuPont
condition more than others. Thus, the condition permits experts to
figure out which of the variables is predominant comparable to an
organization's arrival on value.